Doing up a business budget will help you keep track of your expenses and cashflow. Photo credit: Pexels
You’ve finally done it. You got your new company incorporated, applied for licenses and permits, and have roughly everything you need to open for business.
But before that, you need to get the not-so-fun part out of the way first – and that involves… doing up a budget.
It’s hard to know where you are going until you know how far you can actually go. But with a budget, you can estimate your future income and expenses.
Start-ups or SMEs often make the mistake of running a business without doing up a budget beforehand, only to find themselves out of funds in the third month of operations.
The problem is, because your business is new, you have no historical records of good or bad months to rely on. This means you will have to make some assumptions about revenue.
So while drawing up a business plan was crucial, it is only after you add in some figures that you have a clearer idea of what you need to save up for and cut back on.
If you are burning through your funds more quickly than expected, the budget can help keep your expenses in check before your losses start ballooning.
Read our guide to doing up a business budget below.
This is the most important step. The budget goal is the total amount you are willing and able to spend on your business.
It should include both the funds you have on hand now, as well as the amount you can raise from your family or friends. Only borrow what you can pay back.
It will probably be hard for you to get a business loan at this point, since you have no records to prove how profitable your company is.
In general, most lenders require a business to be operational for at least six months to two years before they extend a loan.
Put aside a small buffer from the budget goal that you can use in case your funds run dry sooner than expected.
This reserve amount can be used for emergencies or when you need to tide over some rough months. But try not to use it if you can help it.
The first six to 12 months of any new business are by far the most challenging.
Do up your budget every month so you can gauge your spending pattern, which will become more apparent once you get past your first month of operations.
Unfortunately, although your monthly expenses are pressing realities, you need to do some guesswork on your monthly sales income.
This is because you have no way of knowing how many customers you will have since your company is new.
Accounting software such as ABSS, QuickBooks and Sage can make your job a lot easier.
Only spend on things that you absolutely need. For instance, rental, renovation costs, office furniture, computers, utility bills, Wi-Fi, a landline, photocopying machine, water dispenser, etc.
Make every dollar count. Forget about getting fancy blinds, an office-cleaning robot, or a swanky fish tank for fengshui purposes.
If you find it difficult to do this, categorize any potential purchase into Must Buy, Need Not Buy and To Buy (i.e. items you can buy later when your business is solvent).
Fixed expenses refer to costs that do not change, no matter how many customers you have per month, for example rental, utilities, phone bills, insurance costs, accounting fees, office supplies, and advertising and marketing fees.
Variable expenses change along with the number of customers you have. Some examples include raw materials, production costs, courier/shipping costs, postage and mailing costs, plus any other ad-hoc costs.
Include both types of expenses in your budget.
In an ideal world, all SMEs or start-ups would be profitable from Day One. However, this is often not the case, especially during a pandemic.
So don’t be too optimistic when doing up your budget. An important tip: Always estimate your costs or expenses to be higher; and your estimated sales, lower.
Firstly, this will give you a more accurate (if more dismal) picture of your finances and prevent you from overspending, since it will take a while for your business to gain traction in the market.
Secondly, it is likely that you will spend more than you expect.
You have no historical data to base your assumptions on. But you can do up three types of sales projections that reflect the best-case scenario, worst-case scenario, and a likely scenario.
The first shows up your most optimistic sales projection for the first year of business; the second shows your worst estimation, with very little sales for six months to a year; and the last, a combination of the best-case and worst-case scenarios.
Let’s say you own a small boutique selling women’s clothes. Always assume that you won’t be able to collect 100% of sales projected.
Include the collections percentage in your budget. So if you collect $7,500 out of a projected $10,000 in sales, your collection percentage is 75% for the month.
Next, calculate the monthly variable costs of sales for the month. If your sales estimate is 200 pieces of clothing that each have a variable cost of $3, your monthly variable cost is $3 x 200 pieces = $600.
To get the total expenses for the month, add up your variable costs and fixed costs.
A break-even point is when your income is the same as your costs. When you know your break-even point, you can price your products better.
Calculate this by changing the unit selling price of your product until your income is the same as your costs. The sales volume will change in tandem with this figure.
Now you know how many units you need to sell to break even for the month. Whatever you make above the break-even point is your profit.
This statement records the amount of money going in and out of your account every month. You can use it to track the amount you have left to spend on your business for the month.
Your monthly cashflow statement should include:
Use only the actual amount collected, not the projected estimate. From this figure, deduct your total costs for the month to get your cash balance for the month. This figure should not be confused with your profit, which isn’t always immediately tangible.
But without a cash balance, you won’t be able to keep your business afloat.
Belinda loves thinking about random stuff, and collecting useless bits of facts and trivia. She often roots for the underdog, and believes the world needs more happy endings.
